Educational Articles

From the Survey: Fluor

Michael Collins
| January 19, 2013

Fluor (FLR) is the largest engineering and construction company in the United States, and one of the largest in the world. The company provides engineering, procurement, construction, maintenance, and project management services to various end markets. Fluor has a significant presence in the oil & gas, mining and metals, infrastructure, and power sectors. The company also works with various governmental agencies that include the Department of Energy and the Army. The E&C operator generally works under two types of contracts: fixed price and cost reimbursable. Fixed-cost contracts are higher risk and higher reward as any cost overruns are the responsibility of the company. Under the cost reimbursable scheme, the client takes on most of these extra costs. Currently, Fluor’s $41 billion backlog consists of 86% reimbursable and 14% fixed price. Thus, the backlog suggests a good amount of earnings visibility in the next year.

The mining and metals business has been strong over the last couple of years, due to rising commodities’ prices (iron ore, gold, silver, and copper) largely driven by a rapidly growing economy in China. Currently, the company has iron ore projects in Australia and copper mine ventures in China. The strength of many commodities, following the 2007-2009 financial crisis, lifted prices higher and incentivized mining operators to invest heavily in engineering & construction services. However, demand is expected to moderate and some projects may decline in the coming years. More to the point, the majority of mining and capital equipment providers have scaled back on their 2013 spending budgets. Recently, Fluor lost a combined $2 billion on an iron ore project in Australia and a copper mine in Peru due to weakening demand. We expect the mining business to be helped by work on a number of smaller projects.

The Oil & Gas unit will make up the greatest share of the top line in the next year. The company serves the downstream (refineries), upstream (production and transportation), and petrochemicals & chemicals markets. Currently, the company has a strong presence in Alberta’s oil sands, working on the construction of an oil sands mine, and a processing plant. The company has strong participation in Saudi Arabia, as it primarily builds petrochemical facilities. We expect deep-water platforms and refineries in the Gulf of Mexico to be longer-term catalysts. The Keystone pipeline should bring additional pipeline investment, as Oil & Gas operators look to capitalize on the $20 price differential between NYMEX oil and Brent Crude. Too, low natural gas prices remain attractive for the chemicals industry, which should spur investment on new facilities.

The infrastructure and power markets are poised to drive strong growth in the coming years. The infrastructure concerns in the United States should remain a top priority for the nation. Over the summer, Congress passed the $105 billion Surface Transportation Act that will provide a nice boost to the E&C industry. However, the two-year funding only provides a short-term fix to a longer-term problem. Thus, we believe a larger deal is still likely even with the current gridlock in Congress. There are still a number of projects that are set for bidding in the first half of 2013. The recent legislation, coupled with the strong bidding opportunities in the first half of 2013, should help offset the weakness we foresee in mining the business.

Demand in the power market for gas-fired, solar, wind, and biofuel plants should remain strong, as global warming concerns and emerging nations look for sustainable solutions. Wind jobs will decline this year, even with the $12.1 billion in new wind energy tax credits agreed upon during the fiscal cliff talks. We believe that the industry will be able to stand on its own compared to years past. In fact, in 2012, wind capacity installed outpaced natural gas capability and has more than twice the amount of new power being produced by coal. We expect large-scale solar projects, combined with natural gas plants, and carbon capture and sequestration technology for coal plants to drive the majority of opportunities.

In Flour’s 2012 third quarter, revenues advanced 18% from the previous year, coming in at $7.14 billion. Share net grew at a 10% clip, and finished at $0.86. The share-net result was below our estimate of $0.94, which mostly stemmed from lower-than-expected income from both its LOGCAP contract in Afghanistan with U.S. military shortfalls. Nevertheless, we expect Fluor to build on its 2012 performance and we project a healthy share-earnings gain in 2013.

For a more detailed report on Fluor, including long-term analysis and forecasts, subscribers should examine our full-page report in The Value Line Investment Survey.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.